Press release: Who pays corporation tax?

Nearly 60% of Corporation Tax comes from workers’ wages, making the tax a regressive and stealthy form of income tax

Most of the remaining burden of the Tax comes from capital owners, an economically inefficient way of levying revenues

The government should cut Corporation Tax more quickly to increase workers’ real wages and raise the level of investment in Britain

Almost 60% of the Corporation Tax burden falls on workers’ wages, a new report by the Adam Smith Institute has found. The report, released ahead of this week’s Budget, reviews existing academic studies into the incidence of the Tax and recommends that the government reduce or abolish it.

The report, ‘Who Pays Corporation Tax’, authored by the Institute’s Head of Policy Ben Southwood, proposes that the government significantly reduce, or abolish the corporation tax to reduce the burden on workers, and that it accounts for the lost revenue through either cutting spending or, if necessary, raising the money through more efficient means, such as property, income or consumption taxes.

According to the report, the Corporation Tax’s burden is split between workers— it reduces their pay without appearing on their pay slips—and capital, distorting decisions therefore reducing investment, UK growth and future living standards.

Though economists argue about the exact way in which the tax is initially and eventually split between capital and labour, all agree that the burden is shared primarily between the two.

Ahead of the Budget on Wednesday, the report’s findings should embolden the government to accelerate its corporation tax cuts to increase workers’ real wages and the level of investment.

Ben Southwood, author of the report and Head of Policy at the Adam Smith Institute, said:

“Tax avoidance scandals are often presented as if they were a struggle between the common man and the man—but economists know this is far from the truth. Corporation tax is partially paid by workers through lower wages, and the remaining chunk, though paid by capital owners, is likely to come out of investment, hitting growth and future living standards.

“If it can be done without introducing new distortions, we should definitely abolish corporation tax and get the revenue from a more effective tool with fewer side-costs.”

Eamonn Butler, Director of the Adam Smith Institute, added: “In his Budget this week the Chancellor may announce a modest cut to Corporation Tax. He should go much further: cutting the Corporation Tax significantly will put more money in workers’ pockets and boost the economy by stimulating investment. We need to grow our way back to prosperity by cutting back the state. The Corporation Tax should be the first tax to go.”

The key findings of the report include:

While most of the substantive details are hotly disputed, the best studies of corporation tax find that in an open economy, workers bear a significant part of the burden of the tax, along with owners of capital. In a closed economy—like the world as a whole—the burden falls mainly on capital owners.

Though results have been contested, the average empirical result puts the burden on workers at 57.6%. Averaging theoretical studies is much more difficult, mainly because each study gives such a wide range of results over such varying sets of circumstances.

Nearly all economists agree that taxes on capital are highly distortionary, and thus unattractive as means of raising revenue. Owners of capital do tend to be wealthier than non-owners, but capital taxes are far from the best way of redistributing wealth.

Transparency is a virtue of a tax system, and many workers are unaware that their wages are lowered by corporation tax.

In the presence of an extremely complex regulatory and legal regime like the UK’s, the costs of corporation taxes become even higher by distorting key decisions like choices between debt and equity.

The interaction between corporate income taxes and corporate gains taxes may complicate the question, necessitating reforming both in order to properly reform one.

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org / 07980 627940. The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.